Meredith Whitney: Detroit reminds investors of consequences to come

Detroit’s decision to file for Chapter 9 bankruptcy shouldn’t be regarded as a 'one-off' in the municipal bond markets — this is a trend bondholders will have to face in the foreseeable future, claims financial analyst Meredith Whitney.

If muni-bond investors were to step into their time-traveling Delorean and set the clock back to 2010, many would recall that Whitney said there could be between 50 and 100 cities defaulting on their debt, resulting in hundreds of billions in potential losses.

While Whitney overshot that mark by quite a bit, there have been a few municipal defaults during the past few years.

"There are five more towns like Detroit and Michigan alone. There are many more municipalities across the country in similar positions," Whitney pointed out in a Financial Times op-ed piece.

She continued, "Detroit’s decision last week paves the way for other elected or non-elected officials to make a decision to save their cities and towns, decisions that probably involve politically unpopular actions that may secure their long-term viability."

Ironically enough, HousingWire reached out to Whitney before her op-ed piece hit the street and asked her to speak out on the Detroit bankruptcy — her people informed us that Whitney would not have the time to discuss the issue with us. However, Whitney has been discussing muni bonds for some time, even stirring up controversy a few years back.

So, what’s at the root of the problem that has flipped the world of municipal finance upside down? Elected officials.

"For decades, across the U.S., local leaders ran up tabs for future taxpayers; they promised pensions and other benefits for public employees that have strong legal protection," Whitney argued.

She added, "That has been a great source of patronage for elected officials; they can promise all sorts of future perks to loyal supports with very little accountability on the delivery of those promises."

In the case of Detroit, elected officials are siding with the residents — for the first time in a very long time, Whitney stated.

However, this comes at the price of pensions and bondholders.

"The aftershocks of the largest municipal bankruptcy in U.S. history will be staggering," she forewarns.

Christina Mlynski is a Reporter at HousingWire. She graduated with a bachelor's degree in news/editorial journalism from the University of North Texas, and previously worked for publications such as the Dallas Business Journal and Dallas Observer.